Suppose firm XYZ has the following balance sheet figures: ...
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Finance
Suppose firm XYZ has the following balance sheet figures:
Book value
Bonds: 8% coupon rate, annual coupons, 10 years to maturity
$1.0 million
Preferred shares: 10% dividend rate
$1.0 million
Common equity: common shares 100,000 shares issued at $15/share
$1.5 million
Retained earnings
$0.5 million
Total
$4.0 million
Assume the marginal tax rate is 40%. The market interest rate on similar risk 10-year bonds is 6%. Similar risk preferred shares are providing yields of 8%, and the common share price is currently $25.
(1) Find the market value proportions of bonds, preferred shares, and common equity in total asset value.
(2) Assume that the firm paid a dividend per share last year of $1, which is expected to grow at 5% per year indefinitely. What is the cost of common equity? What is the firms WACC?
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